Student loan debt is a $1.4 trillion problem — here's how to deal

Student loan debt in America has been at a crisis level for a long time. In 2012, the Federal Reserve Bank of New York estimated borrowers owed $870 billion in student loan debt. That number has only grown, and that growth has been astronomical. Estimates now place collective student loan debt at $1.4 trillion, which is greater than the GDP of nations like Australia and Spain.

That debt is a drag on our economy. It represents money borrowers could spend on boosting the economy instead of paying their loan servicers. This debt can slow down borrowers from buying their first home or starting their own business, and limits how much they can invest in their retirement. And the harder it is to pay off, the more consequences borrowers suffer, as delinquent loans damage the borrowers’ credit scores and saddle them with unmanageable interest.

What is to be done?

A new report from the Levy Economics Institute of Bard College shows why this debt is so harmful to the U.S. economy. The Macroeconomics of Student Debt Cancellation models two scenarios where the U.S. government issues a one-time cancellation of all student loan debt. Its authors found “debt cancellation lifts GDP, decreases the average unemployment rate, and results in little inflationary pressure (all over the 10-year horizon of our simulations), while interest rates increase only modestly.”

The simulations suggest that debt forgiveness would create millions of new jobs, stating “two years after inception, student debt cancellation alone might create 50% to 70% as many jobs in its peak year as the current economic expansion creates in an average year.”

Over a 10-year period, student loan debt cancellation could contribute an average of about $94 billion in GDP per year, according to one model, and $25 billion per year according to the other. Those numbers rise to $108 billion per year and $86 billion per year, respectively, when the report accounts for a scenario where the Federal Reserve’s short-term interest rate remains the same throughout the cancellation period.

Canceling student loan debt could also help minorities have more upward mobility. According to the report, "Black and Latino graduates, whose household finances are already affected by racial gaps in wealth, income, and employment — even with a college degree — encounter a disproportionate burden as debt payments after graduation constitute a larger portion of household budgets."

The report goes on to say that “minority populations are significantly more likely to be burdened by their student debt payments (as a percentage of their income), and thus to go delinquent on their loans.”

Similar proposals to solve the student loan crisis gained traction in recent years. President Barack Obama signed an executive order in 2014 that would forgive federal student loans if the borrower made payments on time for 20 years, or 10 years if the borrower worked in public service. In the 2016 election, both Hillary Clinton and Sen. Bernie Sanders proposed tuition- and debt-free college as part of their presidential platforms.

A 2017 Morning Consult and Politico poll showed 47% of Republicans and 80% of Democrats either “strongly support” or “somewhat support” a “proposal to make four-year public colleges and universities tuition-free.”

How student loan debt cancellation would work

The report outlines how the U.S. government would cancel student loan debt, with two primary actions: “The current portfolio of student loans held by the ED [Department of Education] would be cancelled or, equivalently, borrowers would simply be allowed to stop making payments … the ED would either purchase and then cancel, or, equivalently, take over the payments on student debt currently held by the private sector.”

The report recommends the government take over the payments rather than saddle private lenders with enormous losses.

The proposals offered are distinguished by whether the loan cancellation is carried out by the Department of Education or the Federal Reserve. But “whether the cancellation is carried out by the federal government or the Fed, the outcome is the same in terms of the financial positions of borrowers and the federal budget.”

Beyond student debt

Despite accruing all this debt, people with a bachelor’s degree tend to earn higher wages than those who only completed high school, not just from better opportunities but the fact that the opportunities exist at all.

As Matt Bruenig, founder of the People’s Policy Project, wrote, “students, regardless of their economic background, are on track to do way better than non-students.”

Bruenig said a focus on student benefits may be unfair when comparing the outcomes of entering different professions.

“Lawyers and doctors have higher debt loads but in general have higher incomes,” he said. “So would blanket forgiveness be fair if it gives them more money than poorer graduates?”

Bruenig is skeptical of a system that rewards people who completed college instead of a system that provides benefits to people based on their need.

He is in favor of what he calls attachment benefits, which he defines as “benefits that help all young adults become attached to the labor force."

“Some get attached to the labor force through college and so they will get benefits for that. Others get attached through training programs and they should get benefits for that. Others jump right into the labor force at low pay to get experience and they should get subsidies for that.”

Student loan debt cancellation does little for those who never had the chance to become students in the first place.

“The transition from childhood to the labor market generally involves acquiring skills or acquiring experience in all sorts of ways and we can support all of that,” Bruenig said. That could mean funding colleges, vocational training, apprentice programs, or public-sector jobs, as well as subsidizing private sector jobs.

"The basic idea is as people enter into adulthood, they have diverging paths into the labor market," Bruenig said. "And we need to support all of those paths with public benefits."

What to do if you owe money now

We’re a long way from student loan forgiveness as an actual policy. In the meantime, if you’re in debt, here are a few things you can do to help you pay it off faster.

Set a budget. This will help you get a picture of where your finances stand and where you can improve. The more you save, the more you have left over to put toward ditching those student loans. Don’t know how to create a budget? This easy-to-use spreadsheet is all you need to get started.

Cut back on unnecessary spending. Now that you know where your money is coming and going, you can figure out what to change. That could mean things like dining out less, canceling subscription services you no longer need, or shopping at discount stores.

Adjust your monthly payments. The Department of Education offers plans to help students repay their loans by adjusting their payments according to their income. You can read more about your options here.

Consolidate. If you have several student loans, you may be able to consolidate them into one. This can make it easier to keep track of them, but may also help you get a better interest rate. You can read more about consolidating student loans here.

Make extra payments. If you have extra funds one month, put it toward paying off your loans. Make sure you notify your lender that this extra money should go toward your principal and not the next payment. This way, you'll get more milage on that extra payment. If you put it toward your next payment, it'll go toward the accrued interest instead.

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